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IFRS implementation issues

IFRS Interpretations Committee Update

In this session the Director of Implementation Activities provided an update from the July 2015 Interpretations Committee meeting, highlighting three items in the July 2015 IFRIC Update.

The first item highlighted was the IFRS 11 item that arose from a request received by the Interpretations Committee to clarify whether a previously held interest in the assets and liabilities of a joint operation is remeasured to fair value when the investor’s acquisition of an additional interest results in the investor becoming a joint operator (i.e. obtaining joint control) in the joint operation. He explained that the scope of this item had been expanded to include other transactions involving changes of interests in a business when there was either a lack of guidance or diversity in practice, and that the Interpretations Committee had also asked the staff to analyse similar transactions when there isn’t a business present. He noted that the Interpretations Committee had discussed this issue at its September 2015 meeting, and that the staff would be bringing a paper to the IASB setting out proposals for clarification in the Standard with respect to some of these transactions and asking for the IASB’s guidance on one transaction in particular that potentially interacts with the equity accounting project.

One IASB member reiterated the comments made in the revenue discussion earlier in the day that the IASB should try to minimise changes to new standards. He spoke of the challenges faced by countries following a convergence approach (for example, China) when the IASB was making ongoing changes to a Standard. The Director of Implementation Activities pointed out that the amendments that had been made to IFRS 11 were to try to fill gaps in the literature rather than change the requirements.

The second item highlighted was the IFRS 2 item with respect to comments received on the proposals for three narrow-scope amendments to IFRS 2. The Director of Implementation Activities noted that in general, the responses were mostly supportive of what the IASB was intending to do, but a number of suggestions were also received as to how the amendments being proposed could be improved, and that the staff would be bringing a paper to the IASB at a future meeting detailing those recommendations. He drew the IASB’s attention to the narrow-scope amendment in relation to the classification of share-based payment transactions with net settlement features. He noted that this was an area where there was currently a distinct difference between IFRS and U.S. GAAP because U.S. GAAP included a specific exception permitting such a transaction to be accounted for as if it was equity-settled in its entirety, notwithstanding the cash-settled portion of it. He added that this was an area where there had been significant diversity in practice under IFRS, which had resulted in the proposed amendment to introduce an equivalent exception into IFRS 2. He further noted that one of the items that had come out of the Interpretations Committee’s discussions was that an additional disclosure should be added to this amendment. He explained that the effect of the exception is that such transactions would be accounted for using equity-settled accounting through to the settlement of the obligation, and then at the point when the cash is paid to the tax authority the additional amount that is being paid as cash would be recognised, which could be higher than the equity-settled value (as this is based on the grant date fair value); whereas, had cash-settled accounting been used, the entity would have been revaluing to the current value of the share each reporting period, and so under the amendment there is a true-up event when the cash is paid which is only dealt with at that time. Accordingly, the Interpretations Committee recommended that an additional disclosure be required during the vesting period to alert readers of the financial statements to the fact that there is going to be an additional payment coming through, which otherwise would not be disclosed or recorded in the financial statements.

An IASB member expressed concern that, under the proposed amendment, there were a number of circumstances where the fact that true-up adjustments were not being performed along the way, resulted in a ‘sudden’ adjustment at the time of settlement – for example, if an entity initially had equity of CU15 as its obligation, but this actually turned out to be cash of CU30 - because the true-up has been taken away (through the exception) – suddenly, what was recorded as CU15 of equity becomes CU30 of cash. She noted that users of financial statements had expressed concerns as to how useful this information was, and noted that the proposed additional disclosure requirement would be helpful. She also noted that in some situations, an entity could end up paying cash to the employee if the amount of shares set aside turned out to be more than what the entity needed to use to settle with the tax authority, which was something that the IASB had not thought about when proposing the amendments.

The Director of Implementation Activities noted that this issue had been highlighted in the comment letters received, and that the staff had developed examples to bring to the IASB showing how the numbers worked both in terms of a simple cash payment to the tax authority, and in a scenario where more shares were withheld than were actually used to settle the tax obligation and that balance was paid in cash – and how the additional cash would be accounted for.

Another IASB member commented that he believed it would be odd that, if the IASB was creating an exception, in a situation where an entity had over withheld, and then had to return some cash, that all of a sudden, this would change the character of a transaction, the exception would be overridden and the portion over withheld would have to be treated as a cash-settled plan or liability. He noted that this approach did not make sense with the concept of an exception, because what was happening here was an entity was truing up the amount of cash originally collected – and if it was wrong in the first place, returning it. He noted that requiring entities to bifurcate this into two different types of plans would be making things overly complex.

The third and final item highlighted was the recommendation for an annual improvement to IAS 23 with respect to borrowing costs on completed qualifying assets, where the Director of Implementation Activities notified the IASB that the staff would be bringing a paper on this to a future meeting.